REIA President and her partner fined $10,000 for failure to respond to her private lending practices. Here’s a practice that happens at every Real Estate Investor Association (REIA). One player is cruising the crowd to seek out a private lending partner while the private lenders are seeking out potential investors needing short-term funding. It’s not really new and it happens across the nation every monthly REIA meeting.

So what’s the problem?

I posted the case below from the State of Washington involving a REIA president. You can read the findings by the Securities Division and learn where the REIA president went wrong. I receive these every week from clients, concerned investors and those that have been taken advantage of by some operating outside the laws and regulations set forth by the State or the SEC regulators. In this particular case there are several issues:

• The practice involves the sell of a security.

Even though you purchased the guru’s super-deluxe private lending package with a securities manual, it is not going to save you or a REIA president from the reach of security regulators. See the other post called “Private Lending, Is it Dead?” for more information on securities regulations.

• Failure to disclose the risks involved including:

• The source of funds to repay the loan
• The payment history of past notes and trust deeds.
• Failure to give financial statements and appraisal information.
• When offering the notes, the REIA president and partner failed to disclose the properties were in a flood plain.
• The respondents stated these notes were a “No Risk Loan”
• They also failed to mention the properties were in foreclosure because they have defaulted on the two prior loans against the property

The State of Washington (no different than your State) ranks the following as #2 in the Investment Scam Top

Promissory Notes, Deeds of Trust, Real Estate Investment Schemes

Promissory notes are an important means by which companies raise capital. Unfortunately, there have been many instances of unscrupulous individuals pushing bogus promissory notes. While fraudulent promissory notes appear to give investors the two things they desire most — higher returns and safety — they may not be worth the paper they’re printed on.

Promoters may claim the investment has little risk, because the promissory note is secured by a deed of trust, but such investments are rarely without risk. For example, the promoters may fail to record the deed of trust for the investors’ collateral or the total amount of funds secured by the deeds of trust may far exceed the value of the property. Remember, all investments involve some form of risk – only invest what you can afford to lose. (Source: http://www.dfi.wa.gov )

You can download and view the sanitized version of the Order from the Washington Department of Financial Institutions – Securities Division REIA Pres Violations Download Link.  (DOWNLOAD LINK)

Here’s your takeaway from this -

• Even though some are teaching the above is legal, they’re wrong. It’s not.
• You cannot trust a kit or box of manuals to keep you in compliance with securities regs. Or what you read on discussion forums or in a webinar. (Stay tuned for a new post on the biggest lies by the gurus regarding private lending.)
• Accepted practices at monthly meetings doesn’t equate to it being accepted by regulators.
• Failure to disclosure past performance especially failure to pay will result in stiff penalties.
• Willingness to cooperate with regulators will result in a fine and further inquiries.

You can raise all the capital you can dream of – legally. For now, postpone your efforts to raise private until you get in compliance with regulators. If you raise money legally (register), fully disclose all materials facts, and use it for the stated purpose, you’ve just reduced our liability to virtually zero with regard to the securities regulators.

You can do this for your own state or the state where you have investors. Don’t be surprised at your findings. You’ll find several real estate investors, developers, and private lenders on the list of selling unregistered securities. Regulators are currently increasing their efforts to crack down on real estate investors that are using OPM for their investments.

There are legal ways to raise capital for your ventures so don’t let these reports discourage you. I share them to combat the vast amount of misinformation pitch by gurus with little to no experience in raising capital.

NOTE: This order is being contested by the REIA president. They’re currently taking depositions and the outcome will be updated on this page once it’s finalized.